Active managers forced to miss out on market gains

If you wanted to outperform the market in 2020, you obviously needed to load up on technology giants like Apple and Amazon. Unfortunately, for many active managers, that option wasn't available to them.

The big five – Apple, Microsoft, Amazon, Google and Facebook – now account for a record 25 per cent of the S&P 500's total market capitalisation. Apple accounts for 7 per cent of the index, while Microsoft and Amazon's weighting also exceeds 5 per cent.

Other indices are even more lopsided; although the Russell 1000 Growth index consists of 1,000 stocks, the aforementioned five tech companies make up 39 per cent of the index.

Such levels of concentration are problematic for many active funds, according to Goldman Sachs in a recent note. Diversification requirements mean many funds cannot have more than 5 per cent of their weighting in one stock and no more than 25 per cent in any one sector. That means some managers will be forced to underweight the likes of Apple and Microsoft, even if they think they are going to the moon and beyond.

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In an average year, most active funds underperform the market. With many managers forced to limit their exposure to this year’s biggest market winners, the stats for 2020 may be even worse than usual.